Intel Can't Hold $25 - TheStreet

Updated from 9:50 a.m. EST

Wall Street had qualified praise for

Intel

(INTC) - Get Report

Friday after the microprocessor giant raised the low end of its revenue guidance for the first quarter and said gross margins will be better than expected.

But the enthusiasm quickly ebbed as the morning wore on, and Intel fell below the $25 level that has

stymied investors several times during that stretch. Recently, the stock was down 34 cents to $24.51.

Merrill maintained a neutral rating on the stock. The brokerage, like several others Friday morning, was pleased with the estimate revision but said strong underlying demand might be more of a blip than a trend.

The mid-quarter update capped a solid week for chip makers.

Altera

(ALTR) - Get Report

,

Xilinx

(XLNX) - Get Report

and

National Semiconductor

(NSM)

all had strong earnings news earlier.

"These are good numbers from Intel," said JMP Securities analyst Krishna Shankar, who noted that he had expected Intel to both narrow the low and high ends of its sales range.

Intel now expects sales between $9.2 billion and $9.4 billion and gross margins of around 57%. The Santa Clara, Calif.-based company doesn't provide public targets for its bottom line.

At the quarter's start, Intel forecasted sales between $8.8 billion and $9.4 billion and gross margins of 55%.

"Our outlook anticipates a seasonal quarter toward the better end of forecasts," said CFO Andy Bryant. But he cautioned investors not to get too excited. "This is a slight increase in the midpoint -- $200 million on a base of $9 billion isn't a big number."

Analysts had expected earnings of 28 cents a share on revenue of $9.15 billion, on average, according to Thomson First Call.

"This is indicative of a good product mix, especially for Centrino and growing success of 64-bit Xeon processors," said Shankar, who owns shares of Intel stock. (JMP does no investment banking with Intel.)

Intel's new sales goals represent a sequential decline of 2% to 4% compared with a typical decline of 5% to 7%. Bryant said the improved forecast comes from all products and all geographies in which chipsets, as well as certain microprocessors, are under tight supply.

The first quarter is typically the weakest quarter for Intel and other semiconductor manufacturers, as consumers take a break from spending splurges in the fourth quarter.

Analyst Tai Nguyen with Susquehanna Financial said Intel's numbers affirm his belief that overall demand for PC chips this quarter are proceeding better than expected. This will benefit

Advanced Micro Devices

(AMD) - Get Report

in the current quarter, as well, he said. (Susquehanna does no investment banking.)

AMD is Intel's primary competitor in the markets for computer processors and flash memory. Its shares climbed 1.1% higher to $17.20 in after-hours trading.

Intel said its margins will be better than expected because of reduced microprocessor unit costs and because it has incurred start-up costs that were lower than expected to build a state-of-the-art factory. Bryant said the start-up benefits represent a one-time event.

He declined to discuss the second quarter, but posited that if sales follow a seasonal pattern in the second quarter and decline, and start-up costs increased from the first quarter, then the company might see gross margins decline sequentially in the second quarter.

Investors had anticipated that Intel's gross margins would increase throughout the year, with the first quarter representing the bottom. Gross-margin expansion is viewed by many investors as a necessary factor for Intel's stock to increase. In past periods when Intel was able to grow its margins, the company's stock typically increased.

Still, most of the expected gross-margin expansion this year was expected to occur in the second half of the year. Bryant said he was keeping his full-year gross-margin target steady at 58%, but several questions from analysts on the conference call revolved around the possibility that Intel would beat its 58% gross-margin target.

Bryant responded by stating that the minor benefit Intel is getting this quarter in its margins from its reduced start-up costs won't make much difference across an entire year. He said there's no change in the company's plan to bring its new factory on line, which will make chips with transistors spaced 65 nanometers apart.

Most of Intel's chips are currently made with transistors spaced 90 nanometers apart. Chips from the new factory will be more efficient and cost less to make, something that should help Intel reduce its product expenses while enabling it to produce more chips at a time.